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Thel Final9/18/2008 1:11 PM944 The Journal of Corporation Law [Vol. 33:4regulatory structure it created may be more consistent with the structure and evidentpurpose of the Securities Act than has generally been recognized.II. PROSPECTUSES, FREE WRITING, AND FREE WRITING PROSPECTUSESA. ProspectusesThe Securities Act is built around section 5, 7 which makes it unlawful to offer asecurity for sale in interstate commerce until the issuer has filed a registration statementcontaining extensive information about the security being offered, its issuer and the termsof the offering, and also makes it unlawful to sell a security until the registrationstatement becomes effective. 8 Thus, absent an exemption from section 5, no offer ofsecurities, written or otherwise, may be made until the issuer has filed a registrationstatement for those securities. The Securities Act defines the term “offer” quite broadly toinclude any attempt to dispose of a security for value, 9 so until a registration statement isfiled section 5 prohibits people who are planning to distribute securities to the publicfrom making almost any statement, written or oral, relating to those securities.After a registration statement is filed, written and oral communications are subject tosubstantially different regulation. Oral offers may be made without restriction, but writtenoffers are problematic because the filing of a registration statement triggers restrictionson the use of prospectuses. With a few important exceptions discussed below, 10 anywritten offer (as broadly defined) is a prospectus. 11 Section 5(b)(1) of the Securities Actmakes it unlawful to use jurisdictional means to transmit a prospectus after a registrationstatement has been filed unless that prospectus meets the requirements of section 10 ofthe Act. 12 Given the Act‟s broad definition of prospectus, this means that almost anywritten communication used to sell a security must meet the requirements of section 10.Section 10 is dense, but essentially it provides that a prospectus must contain orsummarize the information in the registration statement. Section 10 contains twoalternative sets of requirements, 13 one in section 10(a) and the other in section 10(b).7. 15 U.S.C. § 77e (2000).8. Id.9. Securities Act of 1933 § 2(a)(3), 15 U.S.C. § 77b(a)(3) (2000); see also Guidelines for the Release ofInformation by Issuers Whose Securities Are in Registration, Securities Act Release No. 5180, 36 Fed. Reg.16,506 (Aug. 20, 1971) (“[T]he publication of information and statements, and publicity efforts, made inadvance of a proposed financing which have the effect of conditioning the public mind or arousing publicinterest in the issuer or in its securities constitutes an offer.”).10. See infra Part II.B (explaining that free writing is not a prospectus).11. See Securities Act of 1933 § 2(a)(10), 15 U.S.C. § 77b(a)(10) (2000) (providing the definition ofprospectus).12. 15 U.S.C. § 77e(b)(1) (2000) (“It shall be unlawful for any person, directly or indirectly . . . to makeuse of any means or instruments of transportation or communication in interstate commerce or of the mails tocarry or transmit any prospectus relating to any security with respect to which a registration statement has beenfiled under this title, unless such prospectus meets the requirements of section 10.”).13. Although section 10 speaks in commanding terms (“a prospectus . . . shall contain” information in aregistration statement), or, as the Supreme Court put it in Gustafson v. Alloyd Co., 513 U.S. 561, 569 (1995),with an unqualified mandate, the use of a prospectus that does not meet the requirements of section 10 does notviolate section 10. Instead, it violates section 5(b), which requires that prospectuses used in certaincircumstances must meet the requirements of section 10. Conversely, if section 5(b) is not triggered, becausethe offer at issue is exempt or jurisdictional means are not used, section 10 is not triggered. In other words,
Thel Final9/18/2008 1:11 PM2008] <strong>Free</strong> <strong>Writing</strong> 945Prior to the adoption of the 2005 reforms, only elaborate documents prepared with greatprecision and diligence, and almost always carefully vetted by lawyers, met either set ofrequirements.Section 10(a) provides that a prospectus must contain the information contained inthe registration statement, but may omit any information that the SEC determines is notnecessary. 14 Section 10(c) empowers the Commission to require any prospectus tocontain additional information that it determines is necessary or appropriate. 15 Takentogether, these two provisions mean that to meet the requirements of section 10(a), aprospectus must contain the information in the registration statement less whatever theSEC permits to be omitted plus whatever the SEC requires to be included.Section 10(b) directs the SEC to permit a prospectus that summarizes or omits all orpart of the information in a section 10(a) prospectus. 16 Inasmuch as section 10(a) itselfempowers the Commission to authorize information in a registration statement to beomitted from a prospectus, it is not entirely clear how section 10(b) expands the SEC‟ssection 10(a) authority over the content of a prospectus. Nonetheless, there are importantdifferences between prospectuses that meet the requirements of section 10(a) and thosethat meet the requirements of section 10(b).A section 10(a) prospectus is subject to much harsher liabilities than a section 10(b)prospectus. A section 10(a) prospectus is filed as part of the registration statement towhich it relates—indeed, it constitutes the bulk of the registration statement. 17 A section10(b) prospectus need not be so filed if the SEC so provides by rule. More importantly, aspart of the registration statement, a section 10(a) prospectus is subject to section 11, 18 theDraconian liability provision that subjects issuers, directors, underwriters and, in someinstances, accountants and other experts, to liability for false statements in a registrationstatement when it becomes effective. In contrast, a section 10(b) prospectus, whetherfiled or not, is not part of the registration statement for purposes of section 11, and thus isnot subject to section 11 liability. On the other hand, a section 10(a) prospectus is moreuseful to distribution participants than a section 10(b) prospectus. If a security isdelivered after sale, it must be accompanied or preceded by a section 10(a) prospectus. 19section 10 acting alone does not make anything unlawful or actionable. See 1 LOUIS LOSS & JOEL SELIGMAN,SECURITIES REGULATION § 2.B.1 (3d ed. 1989 & Supp. 2007). This understanding of section 10 is socommonplace that it is seldom explicitly stated. Its accuracy can be illustrated by the case of a prospectus usedin connection with an exempt private placement, see Securities Act of 1933 § 4(2), 15 U.S.C. § 77d(2) (2000),for which “compliance” with section 10 would be impossible inasmuch as there is no registration statement, andfor which there is no explicit exemption from section 10 (section 4(2) is an exemption only from section 5). Thefailure to recognize this statutory technique explains much of the confusion in the Supreme Court‟s opinion inGustafson.14. Securities Act of 1933 § 10(a)(1), (4), 15 U.S.C. § 77j(a)(1), (4) (2000).15. Securities Act of 1933 § 10(c), 15 U.S.C. § 77j(c) (2000).16. Securities Act of 1933 § 10(b), 15 U.S.C. § 77j(b) (2000).17. As first enacted, section 10 required that the prospectus contain “the same statements contained in theregistration statement,” but in 1954 it was amended to require the prospectus to “contain the informationcontained in the registration statement,” in both cases with the exception of certain items and any otherinformation as provided by the Commission. Compare Pub. L. No. 73-22, § 10(a), 48 Stat. 74, 81 (1933) with§10(a), 15 U.S.C. § 77j(10)(a). Section 10(a) prospectuses are now filed as part of the registration statement.See Rules 401, 404, 17 C.F.R. §§ 230.401, 230.404 (2007).18. 15 U.S.C. § 77k (2000).19. Securities Act of 1933 § 5(b)(2), 15 U.S.C. § 77e(b)(2) (2000). But cf. Rule 153, 17 C.F.R. § 230.153
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